Currency Forecast - Sterling Vs. American Dollar - 18/08/2010
Today’s weekly chart shows a “bearish engulfing pattern” which analysts are pointing toward as evidence that Sterling has peaked. After rallying from lows around 1.42 over the last three months Sterling fell sharply last week as investors flocked for the safe haven of the US dollar in response to steep declines in the stock markets as evidence of slowing growth increases the cha ges of a double dip. Risk aversion is taking hold, driving a strong rally in the US dollar and Japanese Yen, while other currencies such as the Euro and Sterling are effectively treading water.
A widely expected moderation in UK consumer price inflation was confirmed yesterday. The figure came in at 3.1% for July, down slightly from 3.2% in June. Technical factors were also blamed for yesterday’s weakness after the Pound broke major support levels against the US dollar, leading to broader based selling.
The Pound is trying to put best foot forward this morning after the minutes from the latest Bank of England meeting showed that the nine strong committee voted 8-1 in favour of no change in interest rates. The lone voice for a rate hike was Andrew Sentance, who has voted for tightening at the last few meetings. Investors will be mildly reassured that Sentance is sticking to his guns after a run of weak data on the housing market, and the slowing inflation outlook contributed to a general feeling that we are sliding toward a double dip.
Clients with US Dollar requirements should consider hedging at least half now to avoid the risk of further downside. Alternatively, we have seen a good bounce from the interbank low of 1.5495 this morning. Clients may wish to place stop orders below there (based on the interbank rate) to benefit from any continued rally while limiting the risk of renewed downside.
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Currency Forecast - Sterling Vs. American Dollar - 09/08/2010
Sterling continued to benefit from the Dollar’s broad based weakness last week. The big move was over on Monday as we surged from 1.57 to 1.59, and the rest of the week was spent consolidating those gains. It is no coincidence that the rally accelerated from the start of July, just as the stock markets were rebounding strongly off their 2010 lows. The general background of buoyant investor risk appetite has been a major boost for sterling as traders sell the US dollar and buy riskier currencies that benefit most from economic recovery. However, with interest rates still on hold at 0.5% there is little investment case in buying the Pound. The Bank of England held rates steady again last week, and we will have to await publication of the meeting minutes (9:30am on Wednesday August 18th) to see if there has been any shift in the 8-1 “no change” vote. The monetary policy committee are likely to stick to a cautious tack in the short term as economists closely monitor economic statistics for any perceptible reaction to government budget cuts. As if to underline the anticipated effect of the cuts, data released on Friday showed a 0.5% decline in industrial production in June, compared to an expected rise of 0.2%. The market was also disappointed with a smaller than expected 0.3% rise in manufacturing output. Despite Sterling’s tentative progress over recent weeks the spectre of a “double dip” still looms large in investors’ minds. As long as stocks are rising and the Pound is firm, traders are willing to continue to buy into the recovery theory, but it would only take a few bad news items to damage confidence and send the Pound reeling and traders flooding back into the safe haven of the Dollar.
The technical outlook remains positive. We are trading at six month highs, and are now preparing to attack the resistance at 1.6070. A close above there would open the way to levels like 1.6275 and 1.6460. Meanwhile, it would take a break below 1.5500 to do serious damage to the up trend.
Key data from the UK this week includes trade balance data at 08:30 on Tuesday, and the Bank of England’s quarterly inflation report at 09:30 on Wednesday.
The Federal Reserve make their latest interest rate announcement on Tuesday, and are widely expected to keep rates on hold at 0.25%. Trade balance figures for June are released on Wednesday.
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